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The Federal Housing Administration recently announced policy changes to "strengthen capital reserves and address risk, while continuing to to support the country's housing recovery."

The FHA Policy Changes:

The Up-Front Mortgage Insurance Premium (UFMIP) will increase to build up capital reserves. The premium will increase from 1.75% to 2.25% to go into effect in the spring. FHA will also request legislative authority to increase the mortgage insurance that borrowers pay on a monthly basis.

The credit score and down payment combination will be updated. A minimum credit score of 580 will be required for the 3.5% down payment program, while new borrowers with a FICO score less than 580 will need to put down at least 10%. Most lenders will continue to supercede this requirement as they already require a minimum FICO of 580 or 620.

The maximum seller concession will be reduced from 6% to 3%. FHA claims that the current 6% seller concession exposes them to excess risk by creating incentives to inflate the appraised value.

On a typical $250,000 purchase, here is how the changes would affect the loan amount and monthly payment:

With 3.5% down, and the 1.75% Up-Front Mortgage Insurance Premium (UFMIP) rolled in, the loan amount would be $245,471. With a 30-year fixed rate of 5.25%, the monthly principal & interest payment would be $1355.50. When you increase the UFMIP to 2.25%, the loan amount increases by $1207 to $246,678 and the monthly payment increases by $6.67 to $1362.17/mo.

While not a huge difference, there could be more increases coming, if the FHA gets their way with congress. While waiving the 90-day seasoning rule was a positive change to help reduce the foreclosed housing inventory levels, raising prices on consumers, on the other hand, is not always the best way to dig yourself out of financial problems. But since there is no other alternative for more and more buyers, there is really nothing we can do about an increase, but to trust our elected officials that they will keep the people's best interest in mind. Can you sense the sarcasm?

I'm also not a big fan of the seller concession reduction from 6% to 3%, as this will only affect buyers of lower-priced homes. For example, a 3% seller concession on a $300,000 purchase would be $9000, which should be enough to cover the closing costs and pre-paid items on a no-point loan. On a $150,000 purchase, however, the maximum seller contribution would be $4500, resulting in the buyer most likely needing to bring additional funds to closing, especially in states like Vermont that have a relatively high state transfer tax. In February, the new policies will be posted in the Federal Register. After a comment period, I expect the changes to go through in the spring. I hope these changes will not become a regular occurrence.

Ronald Borch is a loan officer with WJ Bradley Mortgage Capital Corp, located in South Burlington, VT.